W5P1 - Notebook LM

Question 1

What is the ASAD model?

Answer 1

The ASAD model combines the ISLM model from week three and the labour market from week four. It analyses the aggregate supply (AS) and aggregate demand (AD) to understand macroeconomic policy implications.

Question 2

How is the aggregate supply schedule derived?

Answer 2

The aggregate supply schedule is derived by combining the Phillips curve and Okun’s law. The Phillips curve shows the relationship between the unemployment gap and the difference between inflation and inflation expectations, while Okun’s law shows the relationship between the unemployment gap and the output gap.

Question 3

What is the relationship between inflation and output in the short-run aggregate supply (SRAS) schedule?

Answer 3

The SRAS shows a positive relationship between inflation and output.

Question 4

What is the key assumption about inflation expectations in the short run?

Answer 4

In the short run, inflation expectations are assumed to be fixed. This is because they are less volatile and slower to adapt than actual inflation.

Question 5

How does output relate to inflation in the short run?

Answer 5

If output is above the natural level of output, then inflation will be higher.

Question 6

What does the long-run aggregate supply (LRAS) schedule look like?

Answer 6

The LRAS schedule is vertical. In the long run, nominal variables like inflation do not affect real variables like output and unemployment. There is no relationship between the level of inflation and the level of unemployment in the long run.

Question 7

Where is the LRAS located?

Answer 7

The LRAS is at the natural rate of output (y bar), and inflation is equal to inflation expectations.

Question 8

What happens to the SRAS when inflation is above inflation expectations?

Answer 8

When inflation is above inflation expectations, inflation expectations will increase over time, shifting the SRAS curve upwards (to the left).

Question 9

What happens to the SRAS when inflation is below inflation expectations?

Answer 9

When inflation is below inflation expectations, inflation expectations will decrease over time, shifting the SRAS curve downwards (to the right).

Question 10

What is the relationship between unemployment and inflation in the short run and the long run?

Answer 10

In the short run, there is an inverse relationship between unemployment and inflation. This relationship breaks down in the long run. In the long run, there is no relationship between inflation and unemployment.

Question 11

What are the three key takeaways about aggregate supply from this lecture?

Answer 11

The long-run aggregate supply is vertical, the short-run aggregate supply is upward sloping, and in the short run inflation expectations are fixed.